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When a government considers a subsidy for an underdeveloped region, it has several options: the subsidies can be for land, wages, employment, or production. While land subsidy is a lump-sum transfer, the others are meant to promote local production or worker immigration. Under full employment, replacing the lump-sum subsidy with the other subsidies benefit (harm) the recipient region if it specializes in labor-intensive (land-intensive) activities. If unemployment prevails in both the recipient and non-recipient regions, production and employment subsidies benefit, but a wage subsidy harms, the recipient region. We also analyze asymmetric cases where one region attains full employment while the other region remains underemployed.

Regional Subsidies and Interregional Labor Movement